Offset accounts and loan pollution

Discussion in 'Accounting & Tax' started by James Bond, 24th Jun, 2015.

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  1. Perthguy

    Perthguy Well-Known Member

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    Thanks Terry. Yes, it is good I have not invested any of the funds so I can sort it out before I start investing them. If it was not for people like you, I would be blissfully ignorant, mix borrowed and unborrowed funds into one account, invest it and only find out there is a problem with tax deductibility of the loan interest at tax time when it is all too late.
     
    Terry_w likes this.
  2. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Terry,
    let say I am paying 20k as Interest in an 'IO with Offset loan', with no extra fund in offset account, EOY I can claim tax deduction on 20k.

    Now if I put some funds in offset account which reduces the interest paid to 10k, I would be able to claim tax on only 10k?
     
  3. Northy85

    Northy85 Well-Known Member

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    How does it work if IP equity is used to the deposit for another IP that becomes your PPoR in the future?
    Example: Borrow $50k from one IP to fund deposit on $500K property (loan $450k). This basically moves $50k from one tax deductible location to another. But once the new property becomes a PPoR it will no longer be tax deductible but the deposit for the purchase will be still attached to a tax deductible IP loan. Does that mean you have to keep track of were the deposit came from and notify your accountant so that they can not claim interest on that portion of the IP loan?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes that is right because you only incur $10k interest. If you took those funds out of the offset and was charged $20k interest the next year then you can claim $20k - it doesn't matter what the offset funds were used for.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes this is why you should always split loans because you would end up with a mixed purpose loan and must apportion the interest
     
  6. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Thanks terry that's the impression I had but was confused with some of the earlier discussions.

    One more thing
    Let say I have a PPOR for a year and then convert it to IP
    can the stampduty(ACT region) and LMI be tax deducted from the time its IP'd?
    or does it goes under purchase cost and is factored in at cgt claculation?
     
  7. Northy85

    Northy85 Well-Known Member

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    Thanks Terry! I'll have to keep that in mind in the next couple of months then.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not stamp duty. It would only be deductible if the property was an investment if purchased (ACT). LMI is deductible over 5 years so you would still have 4 you could claim.
     
  9. mcarthur

    mcarthur Well-Known Member

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    Hi Terry (or others!),
    On contamination, say I have a loan of $100,000 available ($100,000 loan, fully paid down, but not closed and available to redraw).
    Say I use $50,000 for deposit and stamp duty for IP - interest is fully deductible.
    Intention is to reno, rent out, reval & hold, and repeat with another IP.
    I'm concerned because, assuming I reno before renting it out, I believe the interest on the renovation money isn't deductible (not used to earn income).

    Can I use the remaining $50,000 from that loan to reno the IP without contaminating the original purpose?
     
  10. Wonderland

    Wonderland Well-Known Member

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    I'm all new to this so excuse my ignorance. But what do you all mean about contaminated money and clean money when you speak about the offset account?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Mixing loans happens when you have 1 loan with 2 purposes. Even if you borrow $50,000 to invest into property A and another $40,000 to invest into property B you will have a mixed loan. But where both uses are for investments in the same name it doesn't make much difference tax wise as the interest of the loan will wholly be deductible. You still need to apportion interest, but if you get it wrong there is no tax difference.

    The problems arise when you sell either property A or B because the interest on that $50k or $40k will not longer be deductible. This is why you should split even if all uses will be for investment, but relating to different investments.

    If one use is investment and another personal then you have a more serious issues as you need to apportion the interest and must get this right or you will be claiming too much or too little. You also cannot pay down the non deductible portion independantly of hte deductible. i.e. any deposit into the loan will result in you paying down both portions. This means you are paying off the non deductible loan and losing tax deductions.

    BTW, the interest on $50k used for a reno could be deductible straight away - seek tax advice and see this thread https://propertychat.com.au/community/threads/timing-of-deductions.748/
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Contamination re loans refers to a loan which is mixed purpose with part used for investment and part used for private purposes.
     
  13. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    If you mix borrowed and personal cash in an offset account, it can cause a tax mess.

    If you just think - always keep borrowed money totally separate from your own cash, you should be okay.

    Mostly, don't let a loan get drawn down into your personal bank account!
     
  14. Wonderland

    Wonderland Well-Known Member

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    Thank you Terry and Jess for the clarification. Does this only refer to borrowed funds and personal funds? If you had an IP rent get paid into your offset account which is connected to your ppor, is that different? Or if you used your own cash to pay for maintenance on your IP, is that tax deductible too?
     
  15. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Rent into your offset is perfectly fine as long as there are no borrowed funds in there. It's also fine to pay cash for IP maintenance. It won't affect your deductions at all.
     
  16. mcarthur

    mcarthur Well-Known Member

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    Got it. Thanks.
    I understand. Thanks.
    Yes, I've been watching that one. But I wouldn't be adding - no GF - just standard kitchen, bathroom, paint, etc. Those items don't seem to match the previous decisions. But I will definitely talk with the accountant about it.

    Just checking though, if I assume for the moment that the interest on the $50k for reno is not deductible, is it ok (from a contamination point) to take it out of the same $100k redraw since it's for the same property? The only inputs back to the loan would be rent.
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Assuming the $50k is not deductible (i think it may be) then if you redraw $50k the interest on this portion won't be deductible at the moment. But once the property becomes income producing it will be deductible against the property. So no need to split the loan now. Just apportion the interest between the 2 usages until it is rented. once rented all ok.
     
  18. mcarthur

    mcarthur Well-Known Member

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    Fantastic. Thanks Terry. Gives me more to enjoy the meeting with the accountant :)
     
  19. leon brown

    leon brown Well-Known Member

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    Hi guys rather than starting a new thread i thought i would post here
    i had wrote this up on paper about 3 months ago and found it searching my desk for tax stuff
    is there any holes in this strategy or anything i have overlooked?

    obtain a 50K LOC backed by IP( 50K or thereabouts )

    have all rents paid into LOC
    have all I/P interest out of LOC
    have all rates , insurance repairs paid out of LOC
    Have all deductible investment expenses out of LOC

    have wage paid & into IP offset
    pay all personal expenses out of offset or credit card !



    NOTE the shortfall of my IP's after all expenses is roughly 4K P/A

    Do you believe i should split the LOC into IP accounts or just apportion interest ? I have 4 properties
     
    Last edited: 2nd Jul, 2015
  20. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    well,you know in the old days, STG used to say you cant have an IO offset against a PPOR coz its against the law.............................thereis still some of that flat earth society at the dragon

    ta
    rolf